Department 58

Hearing Date: July 11, 2024

Case Name: Gary R. Belz, et al. v. Cyber 1 LLC, et al.

Case No.: 23STCV09558

Motion: Motion for Summary Judgment, or in the alternative, Summary Adjudication

Moving Party: Plaintiff Gary R. Belz, et al.

Responding Party: Defendants Cyber 1, LLC, Norman Kravetz and Douglas Jacobsen

Tentative Ruling:

Plaintiff’s Motion for Summary Judgment is granted. Based on the undisputed facts, (1) Defendants defaulted on their obligations under the Note and personal guarantees; and (2)there is currently an outstanding balance of $4,883,666.77. Based on the undisputed facts, Plaintiff is also the owner of the collateral pledged as security for the personal guarantees executed by Defendants Kravetz and Jacobsen. No triable issues of fact remain as to any of the causes of action alleged in the complaint.

I. Background

Plaintiff Gary R. Belz, as representative for the benefit of himself and Gary Belz Family LP (collectively, “Lender”) provided a single credit facility of $4,550,000 evidenced by a Promissory Note (the “Note”) executed by Defendant Cyber 1 LLC (“Cyber 1”). The Note was personally guaranteed by Defendants Norman Kravetz and Douglas Jacobsen. It is undisputed that Cyber 1 failed to make a principal payment amount on February 1, 2023 in the amount of $450,000. Cyber 1 has also failed to pay three months of interest on the Note. Under the Note, Lender is entitled to the entirety of the remaining principal balance, plus interest and attorney’s fees.

On April 26, 2023, Lender filed a complaint against Defendants Cyber 1, Kravetz and Jacobsen alleging (1) breach of contract – Note; (2) breach of contract – Personal Guarantees; and (3) declaratory relief.

II. Evidentiary Objections

Defendants’ Objection to paragraph 4 of the Gurvitz Declaration is overruled. (Evid. Code, §§1221 and 1222.)

III. Defendants’ Request for Judicial Notice

Defendants’ RJN of the White House announcement passing HR Bill 2617 on December 29, 2022 and HR Bill 2882 on March 23, 2024 is granted pursuant to Evidence Code section 452, subdivision (c)(“official acts of the…executive…departments of the United States…”).

IV. Discussion

A. Legal Standard

“A plaintiff or cross-complainant has met his or her burden of showing that there is no defense to a cause of action if that party has proved each element of the cause of action entitling the party to judgment on the cause of action. Once the plaintiff or cross-complainant has met that burden, the burden shifts to the defendant or cross-defendant to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto.” (Code Civ. Proc., §437c, subd. (p)(1).)

“A party is entitled to summary judgment only if it meets its initial burden of showing there are no triable issues of fact and the moving party is entitled to judgment as a matter of law. This is true even if the opposing party fails to file any opposition. The court's assessment of whether the moving party has carried its burden—and therefore caused a shift—occurs before the court's evaluation of the opposing party's papers. Therefore, the burden on the motion does not initially shift as a result of what is, or is not, contained in the opposing papers.” (Mosley v. Pacific Specialty Insurance Company (2020) 49 Cal.App.5th 417, 434–435 (landlord’s failure to address issue of whether they were aware of their tenant’s marijuana growing operation was not grounds to grant summary judgment where moving party failed to satisfy its initial burden as to the issue); Thatcher v. Lucky Stores, Inc. (2000) 79 Cal.App.4th 1081, 1086-1087 (court cannot grant summary judgment based merely on lack of opposition; court must first determine if the moving party has satisfied its burden).

In addition, the evidence and affidavits of the moving party are construed strictly, while those of the opponent are liberally read. (Government Employees Ins. Co. v. Sup. Ct. (2000) 79 Cal.App.4th 95, 100.) “All doubts as to the propriety of granting the motion (whether there is any issue of material fact [Code of Civil Procedure] § 437c) are to be resolved in favor of the party opposing the motion (i.e., a denial of summary judgment).” (Hamburg v. Wal-Mart Stores, Inc. (2004) 116 Cal.App.4th 497, 502.)

B. No triable issues of fact remain as to the 1^st cause of action for breach of contract and 2^nd cause of action for breach of personal guarantees

Lender moves for summary judgment of its entire complaint. Lender alleges three causes of action for breach of contract based on three separate agreements: (1) the Note with Cyber 1; (2) the personal guaranty of the Note executed by Kravetz; and (3) the personal guaranty of the Note executed by Belz.

To prevail on Lender’s claims for breach of the Note against Cyber 1 Lender must establish: (1) existence of the contract; (2) Lender's performance; (3) Cyber 1’s breach; and (4) damages. (First Commercial Mortgage Co. v. Recce (2001) 89 Cal.App.4th 731, 745.)

To prevail on Lender’s claims for breach of Kravetz’s and Jacobsen’s personal guarantees, Lender need only establish that (1) Kravetz and Jacobsen executed an agreement assuming liability for Cyber 1’s debt under the Note; (2) Cyber 1, the principal debtor, defaulted on its underlying obligations; and (3) Kravetz and Jacobsen breached their obligation to pay upon default of the Cyber 1. (Civ. Code, §2807; R.P. Richards, Inc. v. Chartered Const. Corp. (2000) 83 Cal.App.4th 146, 154.)

Lender establishes that Cyber 1 executed a Promissory Note on February 15, 2022 whereby Cyber 1 borrowed $4,550,000 from Lender subject to certain explicit repayment obligations. (Plaintiff’s SSUMF No.1; Belz Dec., ¶2, Ex. 1.) Lender provided the credit facility as reflected in the Note. (Belz Dec., ¶2.) Lender establishes that under the Note, Cyber 1 was required to pay the principal balance of $4,550,000 in four annual installments: (1) $450,000 on February 1, 2023; (2) $600,000 on February 1, 2024; (3) $1,000,000 on February 1, 2025; and (4) the remaining principal balance on February 1, 2026. (Plaintiff’s SSUMF No. 2; Belz Dec., Ex. 1, ¶1.)

On February 15, 2022, Kravetz and Jacobsen also executed separate personal guarantees guaranteeing the Note. (Plaintiff’s SSUMF Nos. 9 and 10; Belz Dec., Exs. 2 and 3.) Under their guarantees, Kravetz and Jacobsen promised to pay all principal and interest whenever it became due, including any accelerated balance, upon Cyber 1’s failure to pay. (Plaintiff’s SSUMF No. 12; Bezl Dec., Exs. 2-3, Section 1.) In addition, Kravetz and Jacobsen pledged 7.5% each of their outstanding membership interests in Equity Orchestration LLC as collateral for the guarantees. (Plaintiff’s SSUMF No. 14, Ex. 4, Section 1.)

Cyber 1 failed to make the first payment due under the Note in the amount of $450,000 on or before February 1, 2023. (Plaintiff’s SSUMF No. 16; Belz Dec., ¶4.) Cyber 1 failed to tender any interest payments from February 2023 to the present. (Plaintiff’s SSUMF No. 18.; Belz Dec., ¶¶6, 9.) On March 21, 2023, Lender sent notice to Defendants of Cyber 1’s breach of its obligation to pay the first installment by February 1, 2023 in the amount of $450,000. (Plaintiff’s SSUMF No. 21, Gurvitz Dec., Ex. 5 (Lender’s March 21, 2023 Written Notice).) On April 3, 2023, Defendants informed Lender that they could not make the required payments and cure their breach. (Plaintiff’s SSUMF No. 22; Gurvitz Dec., ¶4.) Kravetz and Jacobsen have also refused to tender the collateral as required by the Pledge Agreement in support of their personal guarantees. (Plaintiff’s SSUMF No. 23; Belz Dec., ¶10.)

Plaintiff submits evidence that the full amount of the Note ($4,550,000) is due. Plaintiff also submits evidence that there is currently $333,666.77 due in interest. (Plaintiff’s SSUMF No. 19; Belz Dec., ¶¶6-9.)

Lender therefore establishes (1) the existence of the Note with Cyber 1 and the personal guarantees with Kravetz and Jacobsen; (2) Lender performance of its obligations by providing Cyber 1 with the $4,550,000 credit facility; (3) Defendants’ breach of the Note and the personal guarantees based on their failure to make the first payment due on February 1, 2023 and the failure to pay interest within 10 days of receiving notice of their default; and (4) the damages suffered as a result of the breach ($4,550,000 + $333,666.77 = $4,883,66.77).

The burden therefore shifts to Defendants to raise a triable issue of material fact as to the first and second causes of action for breach of contract. (CCP §437c(p)(1).) Defendants fail to do so. Defendants fail to raise a triable issue of fact or establish an affirmative defense to the causes of action.

i. Defendants’ defenses based on “course of conduct” and “commercial impracticability” fail to raise a triable issue of fact as to the breach element of Plaintiff’s first and second causes of action for breach of the Note and breach of the personal guarantees

Defendants concede that they failed to make the first principal payment due under the Note and the personal guarantees or interest payments from February 1, 2023 onward. (Defendants’ Responses to SSUMF Nos. 16-23.) However, they claim they are not in breach due to the parties’ “course of dealing” and “commercial impracticability.”

“Course of dealing.” According to Defendants, in prior dealings involving short term obligations, Plaintiff adjusted these obligations to avoid default. (Defendants’ Additional Material Fact (“AMF”) No. 28, Kravetz Dec., ¶11, Ex. C.) Defendants contend they made monthly interest payments until January 2023 on the Note and the personal guarantees, which was consistent with the parties’ prior course of conduct. (Defendants’ AMF No. 32; Kravetz Dec., ¶¶38-43; Jacobsen Dec., ¶¶10-15.) Defendants testify that Lender’s current actions of putting them in default and filing this lawsuit contradicts Lender’s prior course of conduct. (Defendants’ AMF No. 34; Belz Depo., Ex. M, pp. 44, 49-50; Kravetz Dec., ¶¶2-43; Jacobsen Dec., ¶¶2-15.)

Defendants fail to establish that the Note or the personal guarantees were uncertain or indefinite, such that the Court must resort to the parties’ course of dealing to interpret the contract and determine the obligations thereunder. Defendants rely on California Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474 as authority for the proposition that they are not in breach of the Note or personal guarantees based on the parties’ “course of dealing” in connection with prior transactions that are entirely unrelated to the Note.

California Lettuce Growers is inapposite. In California Lettuce Growers, the defendant argued it was not obligated under the parties’ agreement to purchase beets delivered to it by plaintiff, because the parties’ agreement did not specify a price, time and place of delivery and was therefore unenforceable as illusory and void. (California Lettuce Growers, supra, 45 Cal.2d at 481. Here, Defendants do not argue that the Note or the personal guarantees are illusory and void. The court in California Lettuce Growers resorted to the parties’ and the industry’s “course of dealing” to fill in the unstated terms of price, time and place of delivery. (Id. at 483.) Defendants provide no authority for their attempt to use “course of dealing” to amend clear and definite obligations in an agreement.

“Commercial impracticability.” “[W]here performance remains possible, the doctrine of impossibility or impracticability excuses performance of a contractual obligation when performance is impossible or extremely impracticable. A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost. Circumstances that may make performance more difficult or costly than contemplated when the agreement was executed do not constitute impossibility. A party cannot avoid performance simply because it is more costly than anticipated or results in a loss.” (KB Salt Lake III, LLC v. Fitness Intern., LLC (2023) 95 Cal.App.5^th 1032, 1058-1059 (affirming summary judgment of landlord’s unlawful detainer action for nonpayment of rent; defendant failed to present any evidence that cost of paying rent as obligated under the lease could only have been done at an “excessive and unreasonable cost” due to COVID shutdown).)

Defendants submit evidence that they suffered a number of financial setbacks due to the COVID shutdown. (Kravetz Dec., ¶35.) Such arguments have been rejected. (KB Salt Lake III, LLC, supra, 95 Cal.App.5^th at 1058-1059; SVAP III Poway Crossings, LLC v. Fitness International, LLC (2023) 87 Cal.App.5^th 882, 895-896 (impracticability did not apply to excuse lessee from lease payments on health club even though COVID shutdown prevented it from operating the health club, which it maintained was the purpose of the lease).) Defendants fail to establish based on the evidence presented that repaying the Note in accordance with the schedule could only have been done at excessive and unreasonable cost. Defendants do not present evidence as to what they would have had to do to satisfy the payments under the Note. They only state that they suffered severe financial setbacks due to COVID policy. Defendants fail to establish that they were discharged from their obligations under the Note and the personal guarantees due to impracticability.

ii. Defendants fail to raise a triable issue as to damages based on offset

Defendants argue there are triable issues of fact as to damages, because they are entitled to an offset for the collateral pledged as security for the Pledge Agreement. However, Defendants present no evidence as to the value of the collateral—a 15% membership interest in Equity Orchestration LLC—nor may the Court assume that the value of such an interest is greater than zero. Defendants therefore fail to raise a triable issue of fact as to the first and second causes of action for breach of contract based on offset.

C. No triable issues of fact remain as to Plaintiff’s declaratory relief claim and summary adjudication is properly granted as to the third cause of action for declaratory relief

In Lender’s third cause of action for declaratory relief, Lender seeks an order declaring that Defendants Kravetz and Jacobsen “have no right to the Equity Orchestration membership interests and that these interests are the sole and exclusive property of the Lender.” (Complaint, ¶40.) Lender contends that, upon Defendants’ default, right to ownership of the Equity Orchestration LLC membership interests transferred to Lender based on Section 5 of the Pledge Agreement. (Complaint, ¶38.) Lender does not seek a declaratory order regarding the value of the 15% interest in Equity Ownership pledged as collateral for the personal guarantees.

Lender establishes that Kravetz and Jacobsen pledged their respective 7.5% membership interests in Equity Orchestration LLC in the Pledge Agreement executed in connection with the personal guarantees on February 15, 2022. (Plaintiff’s Separate Statement, Issue No. 3, SSUMF No. 14,. Belz Dec., Ex. 4, Section 1.) As discussed above, Defendants failed to make the first principal payment due under the Note, nor did they pay any interest due from February 1, 2023 onward. (Plaintiff’s SSUMF Nos. 17-18; Belz Dec., ¶¶6-9, Ex. 2-3, Section 1.) Lender provided notice of the default to Defendants on March 21, 2023 and Defendants confirmed on April 3, 2023 that they were unable to make the payments. (Plaintiffs SSUMF Nos. 21-22, Gurvitz Dec., ¶4; Ex. 5 (Lender’s March 21, 2023 Written Notice).) Kravetz and Jacobsen have also refused to tender their interests as required under the Pledge Agreements. (Plaintiff’s SSUMF NO. 23.)

However, section 5 of the Pledge Agreement does not automatically grant Lender rights in the membership interests upon Default, nor does it create any obligation on Defendants to voluntarily transfer the membership interests to Lender. (Belz Dec., Ex. 4, Section 5.) Instead, section 5 states as follows: “If a Pledgor shall default in payment of any Obligations or be in violation of any provision hereunder or under any promissory note or other document, instrument or agreement evidencing or relating to the Obligations, in each case, after giving effect to any applicable cure period (any such default, a “Default”), the Pledgee will have all rights and remedies of a secured party after default under the UCC and other applicable law.” (Id.)

Based on the Pledge Agreement, Defendants were not obligated to voluntarily sign over their interests. As Defendants point out in their response to SSUMF No. 24, Lender was entitled to “all rights and remedies of a secured party after default under the UCC and other applicable law.” Lender filed this action and sought a declaratory order declaring its ownership of the collateral, which it was entitled to do under Section 5. Defendants acknowledge that Lender’s action for declaratory relief is a proper exercise of its rights to file an action for judicial foreclosure. (Defendants’ SSUMF No. 24.)

As discussed above, there are no triable issues of fact remaining as to the issue of breach. The undisputed facts establish that (1) Defendants are in default under the Note and the personal guarantees and (2) Lender has exercised its rights under the law to ownership of the collateral based on Defendants’ default per section 5 of the Pledge Agreement. As such, based on the undisputed facts, Lender is entitled to an order declaring it the owner of the collateral pledge under the Pledge Agreement, a total 15% interest in Equity Ownership LLC.

Conclusion

Plaintiff’s Motion for Summary Judgment is granted. Based on the undisputed facts, (1) Defendants defaulted on their obligations under the Note and the personal guarantees; and (2) there is currently an outstanding balance of $4,883,666.77. Based on the undisputed facts, Plaintiff is also the owner of the collateral pledged as security for the personal guarantees executed by Defendants Kravetz and Jacobsen—a 15% membership interest in Equity Orchestration LLC. No triable issues of fact remain as to any of the causes of action alleged in the complaint.